Naming Your Life Insurance Beneficiaries? Avoid These 4 Common Mistakes
After you buy a life insurance policy, one of the first things to do is to name a primary beneficiary and contingent beneficiary. The primary beneficiary is first in line to receive the payout from the insurance policy. If the primary beneficiary passes away at the time the benefit is to be paid, the contingent beneficiary receives proceeds from the insurance policy.
Naming a beneficiary can be tricky. Any mistakes when designating beneficiaries can result in additional costs and confusion. Here are some common beneficiary designation mistakes to avoid.
Naming Minors as Beneficiaries
If you nominate a minor as a beneficiary of your life insurance policy and have also appointed a guardian for your kids, the proceeds will pass to them. The beneficiary can claim the proceeds once they attain majority. Until then, the guardian manages the proceeds. Guardians who manage life insurance proceeds on the behalf of minor beneficiaries are subject to court supervision.
If the policy holder dies without naming a guardian, the court appoints one. Many policyholders create an irrevocable life insurance trust and appoint a trustee to manage it until the minor attains the age specified by the policyholder. They can also provide investment and other instructions for the trustee.
Naming Persons Dependent on Government Benefits as a Beneficiary
Naming a person who receives Medicaid or payments under the Supplemental Social Security Income program can put them at risk of losing these benefits and they may have to wait to re-qualify for benefits.
If you want to nominate a special needs child as a beneficiary, consider creating a Special Needs trust to ensure they can use the proceeds from your life insurance policy while still being eligible for government benefits.
Not Being Specific
Be specific when naming beneficiaries. List the full name of the beneficiaries, their social security numbers, and their address or contact information. Be clear about your intentions, when naming multiple beneficiaries, specify if you want the proceeds from your policy to be divided per capita.
An example: Suppose you have three sons. Your first son has two children, your second son does not have children and your third son has four children. Specify if you want the proceeds from your policy to be divided equally between your three sons or also equally between your grandchildren.
Naming Only one Beneficiary
If a policyholder nominates only one beneficiary and the designated beneficiary dies before them or at the same time, proceeds from their policy is distributed between their heirs. To prevent this from happening, name a contingent beneficiary.
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